Commercial building operational costs increasing at double the rate of inflation

Commercial building operational costs increasing at double the rate of inflation

22 August 2017

The latest figures from Turner & Townsend highlight that during the last ten years operational costs for commercial buildings have increased by double the rate of inflation, (consumer price index - CPI) and four times the rate of construction cost increases.

The company compared increases in the cost of rates, electricity, insurance, maintenance wages, cleaning and security. These were compared with cost movements for the CPI and the cost of non-residential construction from the Australian Bureau of Statistics data.

Gary Emmett, Senior Economist for Turner & Townsend comments, “Overall operational expense items have increased by 58 percent during the last decade, whereas CPI inflation is up by 28 percent and the cost of non-residential construction has risen by 16 percent over the same time period. The analysis covered Sydney, Melbourne, Brisbane, Perth and Adelaide. Both tenants and landlords are now focusing on how to reduce these expenses."

“Primary factors driving cost increases are rates, electricity and insurance. Wages and cleaning costs have increased at inflation or just above, while security increased at less than inflation.”

He adds, “What we discovered is these items tended to increase significantly in some years, however drop off in others. Electricity costs are prone to spikes and troughs, increasing by 18 percent in 2012 and then falling by two percent in 2015 - 2016. Of all the items included, electricity was the most volatile with severe increases experienced in each region during the last decade, but not simultaneously. In both 2010 and 2012 electricity spikes were particularly high across all five regions. The last six months has demonstrated electricity costs throughout Australia are escalating.

“Rates have consistently increased at higher than the CPI in all regions over the past decade. In both 2008 and 2009, these were particularly high in all regions with average rate rises above six percent. Melbourne and Adelaide experienced significant rate increases in 2013 and 2014 of approximately 16 percent.”

Gary cites, “As a result of the national electricity market changes, including a transition to renewable energies, there is a high probability suppliers will continue to increase charges in the short term while new technologies and distribution systems are implemented.

“Higher Council rates reflect a need to increase revenue. Average rate increases of around four percent are currently below the ten year average of 5.7 percent. Weaker public sector wages growth and CPI growth rates may hold rate increases at similar levels within the next few years.”

“Insurance premiums are up 60 percent nationally within the last ten years, more than twice the increase in CPI. Climate change, higher fire and flood risks are likely to increase insurance premiums,” Gary added.

“The commercial building sector is set for solid growth during 2017-18 based on the number of new commercial buildings commencing in the coming year. Office construction is predicted to increase in all of the east coast capitals. Sydney is likely to lead with its strong service economy driven by finance, real estate and insurance. However, Melbourne and Brisbane are also looking to experience a surge with several new projects poised to start.”

Gary continued, “Businesses need to be mindful of the additional costs of building ownership as costs typically spiral upwards. The trend towards higher cost increases across major commercial building expenses is evident over the past decade. Businesses are unlikely to impact on council rate increases apart from lobbying, which is more often than not unsuccessful.

“With electricity so volatile, there is a greater requirement for more sustainable designs. Building owner operators or building tenants should identify sustainable energy saving technologies to reduce power usage, and insist any new buildings install these technologies.”

Statistical analysis also reflects that operating cost increases across the states were fairly evenly spread, with Brisbane marginally higher. Electricity costs have risen by 144 percent in Brisbane within the past ten years, compared to 114 percent nationally.

“When considering where to locate, landlords and tenants are increasingly evaluating whole of life costs rather than up-front costs,” Gary concluded.